Monday, January 25, 2010

There are many comments on the blogs that indicate the financing of many Ann Arbor development projects are misunderstood. These are the comments of the nature:

"The developer is willing to risk his money to build something. The citizens should welcome this because the city will get more tax revenue”

This may be how projects were financed many years ago, but it is not the way most of the current Arbor projects are proposed. Today, the developer typically has very little of his own money invested in the project. Therefore the primary challenge is to get the project funded. In order to get funding the developer needs an approved project.

The first step is to form an LLC for the specific project. This requires some legal support time and it should not be a surprise that many developers are from the legal profession rather than construction. Each project is done as a separate legal entity so if there is an injury, or lawsuit, the bankruptcy of this LLC will not affect the other assets of the developer.

The second step to create some concept drawings. The developer may have to pay for these or it may be possible to get someone to do the work for the promise that they will be paid to do all of the necessary detail work later if the project is built.

Now the developer's work begins. The developer must have the stamina to endure a great many meetings with city staff and Council members. He must convince them that his is a great project and that the city should provide funding. The city funding can take many forms. The developer may ask that the city build a parking structure that serves as the foundation for his building. (First and Washington and the Library Lot) He may ask that the city issue bonds to pay for part of his building or an associated one. (The hotel proposals for the Library lot.) Maybe the city needs to provide street and sewer modifications to handle the increased load of the project. The DDA estimates that $5.3 million of cost of the underground parking structure is to support the development over the parking.

If the city agrees, the developer still needs to find the rest of the funding for the project. But, say, the city has agreed to fund 1/3 of a $50 million project, now the developer only needs to find $33 million more. The amount of the investment and the risk is less than if the entire $50 million were from private investment, so this becomes much easier.

When the developer gets funding one of the first things he does is make a cash draw to pay his development fee. At this point the developer has made money, or at least covered his cost. Present day private-public development projects are usually structured so that the developer makes money before the project is built. The developer would prefer that the project succeed, but once the project is funded the developer will not lose a substantial amount even if the project fails.

The private investors? If their investment is $33million for a project that costs $50 million to build, the project only has to make the normal return on a $33 million investment project to make these investors happy.

The city? The way the agreements are usually structured the city issues bonds and uses the taxes from the building to repay the bonds. But the city bonds are backed by all the taxes of the City not just the taxes from the developer's project. If the project fails and does not generate sufficient taxes to repay the bonds the city must repay them from other taxes.

And if the project succeeds? Thenall the taxes for the next 25 to 35 years will go to pay the bonds and interest. The city will not receive any additional revenue during this time. Yet the city will provide police, fire protection, and other services such as road maintenance. This means that there will be proportionately less money to provide service to the regular taxpayers.

A US House Committee on Oversight and Government Reform concluded that:

"The public justification for public financing, including construction financing with tax exempt bonds, is that this is an investment that brings jobs and consumers to a city’s downtown. Academic research on the value to economic development, however, has universally concluded that sports stadiums, convention centers and hotels do not increase economic activity in downtown areas."

This is consistent with my experience. I have been to many conferences, but the purpose is to learn something, or to present your information and leave, not to party. Most of the time is spent at the hotel or at the conference. There are some junket or boondoggle conferences but they are in Las Vegas, Orlando, Hawaii etc. I cannot see Ann Arbor competing as a destination for these. I am not sure we would want to.

Who wins, besides the developer? Really very few. The public-private development projects are lose-lose propositions for the citizen taxpayer. If the project is successful we lose a little, if it it fails we lose big.